Cleveland Fed President Loretta Mester: Seen really progress on inflation, but we're not there yet

Special guest joining us now, Cleveland Fed President Loretta Mester. President Mester, thank you so much for joining us. Thanks for having me. It's been probably 10 years we've been talking since you've been president and you are about to end your tenure as president at at the Cleveland Fed. But let's start now with the short term and then when we may get get some long term stuff. We've had a couple inflation reports this week. How did you process them? No, it was welcome news. It was great news on the last FOC meeting I was attending, wasn't it? Look, we've been working hard to get inflation down. We've been restrictive on our monetary policy. We've seen really good progress over the last couple of years on inflation. We're not there yet, but you have to look at the whole, you know, group of data and be happy that we're starting to see inflation move back down again after stalling a bit in the first part of the year. Did the last couple months of better inflation reads make you feel like the first three months of worse inflation reads were maybe just an aberration, a turn of the year kind of price change? So the January number, we knew there were some issues with measurement, just residual seasonality, but not really. I mean, you take the data as it comes. You know, we had a stronger economy and you know, there is some balancing between supply and demand. You're going to get readings and you have to take the data as it comes in, which is why we say we're data dependent, meaning that we take the data, we think about what it means in terms of the trajectory of inflation and also labor markets. And then we set our policy to calibrate to that. So I didn't really change my view about inflation, but it is welcome to see that inflation is moving back down again. We'll just need to see that continue a bit longer. So I want to ask an English question and a math question. OK, OK. So the first question is you said we're the Fed is restrictive, are you sufficiently restrictive? It's a good question. I mean that's obviously an issue that we're talking about and markets are talking about. And this is about, you know, how restrictive are you? I certainly if you look at the effect of our policy so far, you can see it affecting the economy, right? We've seen it affect housing markets, we've seen it affect growth rates, we've seen it affect and bring supply and demand in the labor market back together. So it's definitely having an effect whether it's sufficiently restricted. That's why we need to be data dependent and sort of assess where inflation is going. We've always said that we really need to have that confidence that inflation is moving down on a path to 2%. We're not going to. It would be inappropriate to keep rates at current levels until inflation gets to 2%. We're trying to always assess and looking forward. That's the math question. I've had a nice correspondence with your former colleague Jeff Lacker, both online and on air. We had him on, he thinks the Fed may not be restrictive enough, which I think Jeff has always thought whatever. But and, and when you look at what are you looking at in terms of your baseline for where the neutral rate is to judge mathematically how restrictive the Fed is? So, you know, in this summary of economic projections which each, you know, participant on FMC puts in, there's a long run nominal Fed funds rate included in there. Two SCPS ago I raised mine to 3%, OK, in recognition that there are a lot of trends in the economy that may mean that the higher, higher rates are probably the neutral rate going forward. But in any point in time, right you it could be anywhere because estimates are going to be all over the map were there was was sort of the neutral rate higher after coming out of the pandemic? I think so for sure we had disruptions in a lot of markets in terms of sort of the balance between supply and demand. We had labor market participation way down as the economy evolves, right? You really need to assess like how restrictive are you? Are you seeing inflation move back to 2%? Are you seeing labor markets get into better balance? And we are seeing that, right? So now it's just a question of, you know, do we continue on the path that we're on, right, gathering more data, seeing inflation move down? And then once we get to a point where we're pretty confident that inflation is on that sustainable path, that would be a time to think about, you know, lowering the degree of restrictiveness. So I think we can't say at any point in time how restrictive we are, but you can see it as the evolution of the economy happens.